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In a case that has captured national attention, and one that is even more relevant today, an appeals court has reversed a federal court’s decision as to whether the franchisor can be considered the employer of a franchisee’s worker.
At the conclusion of the Orozco v. Plackis trial, the jury found that Craig Plackis, owner of Craig O’s Pizza and Pastaria, was the employer of cook Benjamin Orozco, even though he was employed by one of his franchisees.
Benjamin Orozco worked for Sandra and Arnold Entjers at their Craig O’s Pizza restaurant in San Marcos, Texas from 2007 to 2011. When the kitchen worker’s salary was reduced, he filed a lawsuit against the owners and their company under the Fair Labor Standards Act for not paying him minimum wage and overtime. After the franchisees settled the case, Orozco added franchisor Craig Plackis as a defendant in the lawsuit, alleging he was his employer.
The jury agreed with the former cook, even though he had testified that Plackis did not have direct control over the employees of the franchisee’s restaurant. After awarding Orozco monetary damages, the franchisor renewed his motion for judgment as a matter of law. He argued that the cook failed to present evidence that he, as the franchisor, was Orozco’s employer.
Plackis then appealed the decision from the U.S. District Court for the Western District of Texas. The circuit court reversed the decision, holding that there was legally insufficient evidence for a reasonable jury to conclude that Plackis was Orozco’s employer under the Fair Labor Standards Act, under the “economic reality test.”
“Economic reality test” determines if franchisor is joint employer
DLA Piper attorneys John A. Hughes and Stephanie Zosak reported last Friday that under the economic reality test, courts consider whether the alleged employer: (1) possessed the power to hire and fire employees; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of payment; and (4) maintained employment records.
The attorneys state that although Plackis met with the franchisees and provided advice on improving the franchisee’s profitability, the appeals court held that the franchisor did not possess the power to hire or fire the kitchen employee.
The U.S. Court of Appeals for the Fifth Circuit also concluded that the employee failed to present evidence that Plackis supervised and controlled employee work schedules or conditions of employment in support of the second element of the economic reality test.
The DLA Piper report states that the proximity between Plackis’ and the franchisee’s meeting and the changes to the plaintiff’s work schedule did not establish that Plackis had the power to supervise or control employee work schedules or conditions of employment. It further states that even though Plackis reviewed the work schedules and trained the franchisees and the cook employee did not suggest that Plackis controlled or supervised him at the franchisee’s location because it was reasonable to assume that a franchisor would provide training to new franchisees and their employees.
In the third element to the tests, determining the rate and method of payment, the attorneys said the circuit court felt the kitchen employee did not produce legally sufficient evidence that the franchisor determined his rate and method of pay. The district court had erroneously concluded that because Plackis was aware of the cook’s salary, the jury could reasonably infer that Plackis was essentially advising the franchisee on his salary. And Orozco had testified earlier that Plackis did not control his rate of pay.
The circuit court held that the franchise agreement also failed to support the jury’s verdict. While the contract states certain authorities such as “the franchisee shall at all times comply with all lawful and reasonable policies, regulations, and procedures promulgated or prescribed from time to time by franchisor in connection with franchisee’s shop or business,” the high court determined that it was insufficient evidence to support the jury verdict. The cook conceded that the franchise agreement alone was insufficient to establish that Plackis qualified as the plaintiff’s employer under the FLSA.
And the Circuit Court did not believe that the “innocuous statement” in the franchise agreement that the franchisee had to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel.” suggested that Plackis had supervision and control over employees.
The Circuit Court did not address the fourth element, “maintained employment records,” because the cook conceded that he failed to provide any evidence that Plackis maintained employment records.
Because the NLRB issued a decision last month that McDonald’s Corp. could be named a “joint employer” of the workers in its 14,000 franchisee-owned restaurants, the franchise community is paying close attention to this decision. If the world’s largest hamburger chain is found to be part employer because of the extensive control it demonstrates over its franchisees, it could have a devastating effect on many other franchise companies.
Takeways for franchisors
Attorneys Hughes and Zosak reported that although the Circuit Court stressed that its decision “did not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees,” the case is important for several reasons.
First, the Circuit Court held that although the franchisee implemented the franchisor’s suggestions regarding ways to increase the franchisee’s profitability, this did not lead to an inference that the franchisor had control over employment decisions.
Second, the Circuit Court found that although the franchisor provided training to the franchisee’s employee, this did not suggest the franchisor had control over or supervised the franchisee’s employees.
Third, the Circuit Court held that general language in the franchise agreement regarding the franchisee having to follow the franchisor’s “policies and procedures” regarding the “selection, supervision, or training of personnel” did not suggest that the franchisor had control over or supervised the franchisee’s employees.